integrAsian

3. All roads lead to (or from) China

The Middle Kingdom will be an increasingly important link for regional companies, and the yuan will be critical for facilitating regional business.

China is a major driver of regional integration, whether through initiatives like the AIIB or its backing of the Regional Comprehensive Economic Partnership (RCEP), a proposed free-trade bloc that would encompass ASEAN and other major Asia-Pacific economies like China, Japan, South Korea, India and Australia. In the business world as well, China is a powerful force promoting closer ties between Asian markets. The survey data indicate that despite placing a high priority on expansion in their substantial domestic market, 41% of Chinese companies say they have a single sales strategy for the entire Asian region. That is significantly higher than 25% for all respondents.

How do companies in China intend on executing their regional strategies? Liberal policies will help. Nine in ten firms in China (89%) believe new free trade or investment agreements would have a very significant or significant impact on generating more cross-border business in the region, versus only 53% of Australian companies. Furthermore, 61% say they would view having a dedicated presence in more Asian markets as a major indicator of success, versus a regional average of 51%.

Renminbi usage will support China’s importance in Asia

One of China’s main contributions to regional economic integration may have less to do with diplomatic or business developments than market forces. The survey shows China’s currency, the renminbi, is gaining ground as a de facto regional trade currency, and that non-Chinese companies in Asia, though still heavily dependent on the US dollar, are increasingly using the renminbi. The US dollar was the top choice of respondents, with 37% saying they would use it to settle 20%-50% of their payments and invoicing over the next five years, while 18% say they would use the renminbi, the second-highest choice.

Increased use of the renminbi is a function of China’s trade importance, says Geoff Weir, a director at consultancy Financial Sector Services, who authored a paper on the currency’s internationalisation for Australia’s Centre for International Finance and Regulation. “Particularly in the aftermath of the global financial crisis, there’s a desire to see a wider range of safe-haven currencies develop. That requires reasonable confidence in the economy of the issuing country and in the way the economy is run. You need confidence in the currency, you need size and you need a globally connected economy, and China increasingly has all three.”

Renminbi regionalisation will slowly spread beyond Greater China

Outside of mainland China, firms in Hong Kong and Taiwan were the main renminbi adopters. Indeed, nearly half of respondents in Taiwan say they expect 20% or more of their invoicing or payments to be conducted in the currency in the next five years. However usage also seems to be picking up outside of Greater China; 15% of Indian respondents anticipate conducting at least 10% of their transactions in renminbi over the next five years. By contrast 84% of Australian respondents expected not to use the renminbi at all.

Asian companies from the construction, financial services and manufacturing sectors will likely continue to drive renminbi use. Thirty-two percent of manufacturers and 19% of both construction and financial services companies expect to use the renminbi for 20%-50% of their payments and invoices in the next five years. The retail and technology sectors were more likely to use the renminbi for 1%-20% of their payments and invoices.

“We think there’s going to be more internationalisation of the renminbi and a lot more renminbi-denominated products coming through into Hong Kong, so we will definitely increase our participation in renminbi assets,” says Daniel Weinberg, senior partner at Australia-based proprietary trading firm Optiver.

China’s increasing economic and diplomatic heft will help fuel regional integration and the growth opportunities that come with it—but will also create risks. As other Asian economies are increasingly connected to China, they are also more dependent on Chinese demand, and more likely to be buffeted by its problems. The IMF has noted that due to China’s crucial role in the region’s vertical trade integration, “spillover” effects from growth shocks in China are almost twice as large for Asian markets as those outside the region. This makes Asia more vulnerable to any sharp deterioriation in economic conditions in China, and means China is likely to lead regional economic cycles -- just as signs emerge that the country’s era of red-hot growth is drawing to a close.